Texas Comptroller of Public Accounts    STAR System


201108230H



SOAH DOCKET NO.  304-11-4382.13
CPA HEARING NO.  104,752

RE:  *************
TAXPAYER NO.:  *************
AUDIT OFFICE:  *************
AUDIT PERIOD:  January 1, 2009 THROUGH December 31, 2009

Franchise Tax/RFD

BEFORE THE COMPTROLLER
OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS

SUSAN COMBS
Texas Comptroller of Public Accounts

JAMES ARBOGAST
Representing Tax Division

*************
Representing Claimant


SOAH DOCKET NO.  304-11-4394.13
CPA HEARING NO.  104,753

RE:  *************
TAXPAYER NO.:  *************
AUDIT OFFICE:  *************
AUDIT PERIOD:  January 1, 2008 THROUGH December 31, 2008

Franchise Tax/RFD

BEFORE THE COMPTROLLER
OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS

SUSAN COMBS
Texas Comptroller of Public Accounts

JAMES ARBOGAST
Representing Tax Division

*************
Representing Claimant


COMPTROLLER’S DECISION

************* (Claimant) filed amended Texas Franchise Tax Reports for the 2008 
and 2009 report years claiming a refund on franchise tax paid in error.  
Claimant filed the amended reports using the three-factor apportionment method 
under the Multistate Tax Compact (MTC), rather than the single-factor 
apportionment method permitted under the Texas Franchise Tax Act, which was 
used in filing its original franchise tax reports.  The Texas Comptroller of 
Public Accounts (Comptroller) denied the refund claims on the grounds that 
Chapter 141 of the Texas Tax Code (TEX. TAX CODE ANN. Section 141.001 – 
141.006), which adopted the MTC, does not apply to the Texas franchise tax.  
Claimant requested a refund hearing, contending that the current version of the 
franchise tax, which is based on a taxable entity’s taxable margin, is an 
income tax and therefore subject to the MTC.  Comptroller Staff (Staff) asserts 
that the Texas Franchise Tax Act requires use of the single gross receipts 
factor mandated by TEX. TAX CODE ANN. (Tax Code) Section 171.106, which does 
not provide for an alternative apportionment method.  In his Proposal for 
Decision (PFD), the Administrative Law Judge (ALJ) concludes that Claimant may 
not elect the MTC three-factor apportionment formula and is required to use the 
single-factor method, and therefore recommends that the refund claims be 
denied.

I.  PROCEDURAL HISTORY, NOTICE & JURISDICTION

On April 5, 2011, Staff referred the cases to the State Office of 
Administrative Hearings (SOAH) for hearings based on the parties’ written 
submissions.  The parties subsequently requested that the cases be joined for 
purposes of conducting the hearing and issuing a PFD. The ALJ issued an order 
granting the joinder.  The Comptroller was represented by Assistant General 
Counsel James Arbogast.  Claimant was represented by *************, Claimant’s 
Vice President of Finances.  ALJ Peter Brooks closed the record on June 15, 
2011.  There are no issues of notice or jurisdiction in this proceeding.  
Therefore, these matters are set out in the Findings of Fact and Conclusions of 
Law without further discussion here.

II.  REASONS FOR DECISION

A.  Evidence Presented

Claimant provided the Amended Texas Franchise Tax Reports for report year 2008. 
Staff filed for each hearing the 60-day Letter, the refund denial letter, and 
the refund audit plan.  Staff also submitted the pleadings filed by the parties 
while these matters were pending before the Comptroller.  The documents have 
been admitted into the record without objection.

B.  Adjustments

Staff has not agreed to any adjustments.

C.  ALJ’s Analysis

Resolution of the issue presented by these contested cases turns on whether 
Claimant is required to use the single gross receipts factor in apportioning a 
taxable entity’s margin to Texas as provided for under Tax Code Section 
171.106(a) or may elect to use the alternate three-factor apportionment 
authorized under Article IV the MTC.  The ALJ concludes that Claimant was 
required to use the single-factor method and therefore finds that Staff did not 
err in denying the refund claims.

Tax Code Section 171.106(a) provides for a taxable entity’s margin to be 
apportioned as follows:

Except as provided by this section, a taxable entity's margin is apportioned to 
this state to determine the amount of tax imposed under Section 171.002 by 
multiplying the margin by a fraction, the numerator of which is the taxable 
entity's gross receipts from business done in this state, as determined under 
Section 171.103, and the denominator of which is the taxable entity's gross 
receipts from its entire business, as determined under Section 171.105.

The exceptions provided for in Tax Code Section 171.106, which do not apply to 
Claimant, still require a single factor in apportioning the taxable entity’s 
margin to Texas.  The rules adopted by the Comptroller in implementing Tax Code 
Section 171.106 apply the statutory directive without any modification.  SEE 34 
TEX. ADMIN. CODE Section 3.591(c), which tracks Section 171.106(a) and directs 
that a “taxable entity's margin is apportioned to this state to determine the 
amount of franchise tax due by multiplying the taxable entity's margin by a 
fraction, the numerator of which is the taxable entity's gross receipts from 
business done in this state and the denominator of which is the taxable 
entity's gross receipts from its entire business.”  The rule was effective 
January 1, 2008, and applied to Claimant’s 2008 and 2009 franchise tax reports. 
The Comptroller clearly did not contemplate that an alternative method was 
available for apportioning a taxable entity’s margin. This is further reflected 
in the Frequently Asked Questions (FAQ) that were issued to advise taxable 
entities in filing their Texas Franchise Tax Reports.  In FAQ 2 issued under 
the topic heading Apportionment, the Comptroller advised taxable entities that 
there were no changes to how receipts are apportioned:

The apportionment factor is generally the same as under previous law; however, 
the throw-back provisions were repealed. Also see exceptions for Texas gross 
receipts for transactions between members of a combined group under TTC 
171.1055. [ENDNOTE: (1)]

This advice was subsequently reaffirmed in a more detailed policy statement 
that was adopted and issued in 2010 as State Tax Automated Research System 
(STAR) Accession No. 201007003L (July 1, 2010).  The policy statement addresses 
the question whether a taxable entity may elect to use the MTC’s three-factor 
apportionment formula and explicitly provides that taxable entities are 
required to use the single-factor apportionment factor:

Use of the Multistate Tax Compact (MTC) Apportionment Formula is Prohibited for
Texas Franchise Tax:

The Texas franchise tax is apportioned to Texas using a single-factor 
apportionment formula based on gross receipts as specifically provided in Texas 
Tax Code Section 171.105. The apportionment provision in Texas Tax Code Chapter 
141, related to the Multistate Tax Compact (MTC), does not apply to the revised 
Texas franchise tax and entities may not elect to use the MTC's three -factor 
apportionment formula in lieu of the formula specified in Texas Tax Code 
Chapter 171.

This policy statement was added to the Apportionment FAQs as FAQ 3 on January 
26, 2011.

The Comptroller’s determination that the single-factor apportionment continues 
to apply unchanged to the franchise tax, even after the extensive revisions 
adopted in 2006 by the Legislature (HB 3), [ENDNOTE: (2)] is also reflected in 
the Legislature’s own assessment of the proposed changes.  In the House 
Research Organization’s Bill Analysis, the proposed apportionment provisions 
are described as applying a single gross receipts factor, and no reference is 
made directly or indirectly to the three-factor formula available under the 
MTC. [ENDNOTE: (3)]

Claimant’s contention that it could elect to use the MTC’s three-factor formula 
relies principally on the fact that TEX. TAX CODE ANN. Section 171.112(g), 
which provided that Chapter 141 did not apply to Chapter 171 (i.e., Franchise 
Tax), was repealed by HB 3, and not reenacted by the Legislature.  Claimant 
argues that, as the specific bar against applying the MTC to the Franchise Tax 
Act was repealed, the MTC’s three-factor formula may be used in apportioning 
its margin to Texas.  However, notwithstanding the absence of the repealed 
statutory prohibition, the specific and unqualified requirement in Tax Code 
Section 171.106(a) to use a single-factor formula, buttressed by the 
Comptroller’s rule and policy statements, is more than sufficient to preclude a 
taxable entity from electing to use the MTC three-factor formula.

The Comptroller’s interpretation of the revised Franchise Tax Act is entitled 
to due deference as the agency entrusted with implementing the statute, as long 
as its statutory construction is reasonable and does not contradict the plain 
language of the statute.  SEE TENNESSEE GAS PIPELINE CO. V. RYLANDER, 80 S.W.3d 
200, 203 (Tex. App.--Austin 2002, pet. denied).  The Comptroller’s 
interpretation as stated in both its rules and policy statements is consistent 
with the plain language of Section 171.106 and with the intent of the 
Legislature.  Moreover, Article IV of the MTC was adopted by the 60th 
Legislature in Tax Code Section 141.001, effective June 13, 1967.  Section 
141.001 has not been reenacted or amended since its adoption.  In contrast, the 
single-factor sales formula has survived numerous amendments, most recently the 
2006 adoption of a franchise tax based on a taxable margin, which lends further 
weight to the Comptroller’s position that no substantive changes to the 
single-factor apportionment provisions were intended with the latest changes.  
As noted by Staff the specific rule in Tax Code Section 171.106(a) addressing 
apportionment controls over the general provisions of Tax Code Section 141.001.

In summary, the ALJ concludes that Claimant was required to follow the 
single-factor apportionment formula under Section 171.106, and therefore its 
amended franchise tax reports and the attendant refund claims were properly 
rejected by Staff.

III. FINDINGS OF FACT

1.  ************* (Claimant) filed amended Texas Franchise Tax Reports for the 
2008 and 2009 report years claiming a refund on franchise tax paid in error.

2.  Claimant filed the amended reports using the three-factor apportionment 
method under the Multistate Tax Compact (MTC).  TEX. TAX CODE ANN. Section 
141.001.

3.  Claimant had used the single-factor apportionment method set out in TEX. 
TAX CODE ANN. Section 171.106(a) in filing its original franchise tax reports.

4.  The Texas Comptroller of Public Accounts (Comptroller) denied the refund 
claims on the grounds that Chapter 141 of the Texas Tax Code (TEX. TAX CODE 
ANN.  SectionSection141.001 – 141.006), which adopted the MTC, does not apply 
to the Texas franchise tax.

5.  Claimant requested a refund hearing contesting the denial.

6.  On April 5, 2011, Comptroller Staff (Staff) referred the cases to the State 
Office of Administrative Hearings (SOAH) for hearings based on the parties’ 
written submissions.

7.  Staff issued Notices of Hearing by Written Submission.  The Notices of 
Hearing contained a statement of the nature of the hearing; a statement of the 
legal authority and jurisdiction under which the hearing was to be held; a 
reference to the particular sections of the statutes and rules involved; and a 
short, plain statement of the matters asserted.

8.  The parties subsequently requested that the cases be joined for purposes of 
conducting the hearing and issuing a proposal for decision.  The Administrative 
Law Judge (ALJ) issued an order granting the joinder.

9.  ALJ Peter Brooks closed the record on June 15, 2011.

IV.  CONCLUSIONS OF LAW

1.  The Comptroller has jurisdiction over this matter pursuant to TEX. TAX CODE 
ANN. ch. 111.

2.  SOAH has jurisdiction over matters related to the hearing in this matter, 
including the authority to issue a proposal for decision with findings of fact 
and conclusions of law pursuant to TEX. GOV’T CODE ANN. ch. 2003.

3.  The Comptroller provided proper and timely notice of the hearing pursuant 
to TEX. GOV’T CODE ANN. ch. 2001.

4.  TEX. TAX CODE ANN. Section 171.106(a) provides for a taxable entity’s 
margin to be apportioned by multiplying the margin by a fraction, the numerator 
of which is the taxable entity's gross receipts from business done in this 
state, as determined under Section 171.103, and the denominator of which is the 
taxable entity's gross receipts from its entire business, as determined under 
Section 171.105.

5.  Rule 3.591, 34 TEX. ADMIN. CODE Section 3.591(c), tracks Section 171.106(a) 
and directs that a “taxable entity's margin is apportioned to this state to 
determine the amount of franchise tax due by multiplying the taxable entity's 
margin by a fraction, the numerator of which is the taxable entity's gross 
receipts from business done in this state and the denominator of which is the 
taxable entity's gross receipts from its entire business.”  The rule was 
effective January 1, 2008, and applied to Claimant’s 2008 and 2009 franchise 
tax reports.

6.  In Frequently Asked Question (FAQ) 2 that was issued to advise taxable 
entities in filing their Texas Franchise Tax Reports, the Comptroller advised 
taxable entities that there were no changes to how receipts are apportioned.  
SEE,  http://www.window.state.tx.us/taxinfo/franchise/faq_apport.html#apport3.

7.  The Comptroller issued and adopted a policy statement affirming that 
taxable entities were to use the single-factor apportionment formula and not 
the MTC’s three-factor formula.  State Tax Automated Research System (STAR) 
Accession No. 201007003L (July 1, 2010).  This policy statement was also added 
to the Apportionment FAQs as FAQ 3.

8.  The House Research Organization’s Bill Analysis of the proposed 
apportionment provisions are described as applying a single gross receipts 
factor, and no reference is made directly or indirectly to the three-factor 
formula available under the MTC.  SEE, 
http://www.legis.state.tx.us/BillLookup/Text.aspx?LegSess=793&Bill=HB3#.

9.  TEX. TAX CODE ANN. Section 171.112(g), which provided that TEX. TAX CODE 
ANN. ch. 141 did not apply to TEX. TAX CODE ANN. ch.  171 (i.e., the Texas 
franchise tax), was repealed in 2006 by the Legislature, and not reenacted.  
Tex. H.B. 3, 79th Leg., 3rd C. S. (2006).

10.  The Comptroller’s interpretation of the revised Franchise Tax Act is due 
deference as the agency entrusted with implementing the statute, as long as its 
statutory construction is reasonable and does not contradict the plain language 
of the statute.  SEE TENNESSEE GAS PIPELINE CO. V. RYLANDER, 80 S.W.3d 200, 203 
(Tex. App.--Austin 2002, pet. denied).  The Comptroller’s interpretation as 
stated in both its rules and policy statements is consistent with the plain 
language of Section 171.106 and with the intent of the Legislature.

11.  Based on the foregoing Findings of Fact and Conclusions of Law, Claimant 
was required to use the single gross receipts factor in apportioning its margin 
to Texas, and consequently the amended reports and attendant refund claims were 
properly rejected by Staff.

Hearing Nos. 104752 and 104753

ORDER OF THE COMPTROLLER


On June 16, 2011, the State Office of Administrative Hearings’ (SOAH) 
Administrative Law Judge (ALJ), Peter Brooks, issued a Proposal for Decision in 
the above referenced matter.  The parties were given fifteen days from the date 
of the Decision to file exceptions with SOAH.  No exceptions were filed, and 
the Comptroller has determined that the ALJ’s Proposal for Decision, except for 
minor changes to correct typographical or clerical errors, should be adopted as 
written.

The above Decision is approved and adopted in all respects.  This Decision 
becomes final twenty days after the date Claimant receives notice of this 
Decision.  If either party desires a rehearing, that party must file a motion 
for rehearing, which must state the grounds for rehearing, no later than twenty 
days after the date Claimant receives notice of this Decision.  Notice of this 
Decision is presumed to occur on the third day after the date of this Decision.

Signed on this 18th day of August 2011.


SUSAN COMBS
Texas Comptroller of Public Accounts

by: Martin A. Hubert
Deputy Comptroller

ENDNOTE(S)
(1)  See, 
http://www.window.state.tx.us/taxinfo/franchise/faq_apport.html#apport3.
(2)  Tex. H.B. 3, 79th Leg., 3rd C. S. (2006).
(3)  http://www.legis.state.tx.us/BillLookup/Text.aspx?LegSess=793&Bill=HB3#.




ACCESSION NUMBER: 201108230H
SUPERSEDED: N
DOCUMENT TYPE: H
DATE: 08/18/2011
TAX TYPE: FRANCHISE